In the article on democracy, inequality and capitalism, Milanovic raises the issue that Europe is not used to massive immigration in the way of the US or
Australia. As a result of that and in conjunction with the economic and financial crisis, welfare states are threatened by the the loss of wealth and confidence of the middle classes, which historically have been key to sustain democracy. Europe remains the most attractive region to live, although it is not the most dynamic. It remains a factor of attraction for workers from other regions of the world, but its lack of growth conditions the reaction of local populations to immigration. Milanovic wonders if as a result of this dynamics, the coincidence of capitalism and democracy in Europe is an interlude, an exception limited to the second half of the twentieth century and the early years of the twenty-first. In his most recent article, Milanovic argues that to prevent economic decline, Europe should be ready to accept new immigration in a structured and ordered way. Immigration is inevitable, and it is desirable economically in a continent that is declining in terms of innovation and demographics.

Sunday, October 27, 2013

The
future of the European project is threatened by our own version of the Tea
Party. A populist diverse movement that draws from populism, nationalism and a
modernist extreme right (such as that of Madame Le Pen in France) combines an
anti-politics rhetoric, an anti-immigrant rage and a protectionist anti-European
mentality. It is not a conventional extreme right, which is something it has in
common with the American version. But it is anti-rational, anti-government and
promises simplistic solutions to complex problems, à la Beppe Grillo in Italy.
It is a very serious enemy to all those that think that expanding and improving
democracy and welfare is the solution in a more, and not less, integrated
Europe. The answer to it must be a cultural fight in favour of a post-national
Europe, but one that appeals not only to rationality, but also to feelings and
emotions in favour of a borderless harmonious Europe in peace with itself. In
Spain, the European Tea Party probably does not need any new affiliated
organization, because nationalism (central or peripheral) plays its role and
appeals to the same instincts. But Europe is in danger from this confluence of
populism and nationalism: will the European Union still exist in ten years
time? What if it does not exist? Time for action.

Thursday, October 24, 2013

Traditional economics assumed that human beings were rational but helpless. Rational in the sense that they had well defined preferences and objectives, and everything they did was consistent with them. But helpless in the sense that when their decisions have impacts on others that do not have any role in deciding outcomes, individuals needed external help, in the usual form of government intervention. Instead, the late Elinor Ostrom, in her Nobel Prize lecture in 2009, argued that real human beings are boundedly rational but resourceful. Individuals are more complex than originally assumed by economists. Real humans are affected by systematic biases in their judgment and decicion-making, but also have resources, such as social preferences, to overcome collective dilemmas. Ostrom also emphasizes that goods are also more complex than originally assumed: we don't have only purely private and purely public goods, but there are goods with intermediate degrees of rivalry and excludability (the two dimensions that define whether a good is private or not). Relatedly, forms of economic organization should not be restricted to government versus market, but many different or intermediate forms, such as communitarian or mixed forms of provision, are very often desirable. But Ostrom had a special distrust for those external interventions that try to impose (usually one-size-fits-all) solutions upon communities without exploring first the ability of communities themselves to find institutions that may alleviate collective problems. A potential interpretation of her words is that social problems should not be left to technocrats, or experts (as suggested by libertarian paternalists such as Thaler and Sunstein), but to communities themselves. Ostrom devoted her career to show that features such as communication, trust, egalitarianism, transparency, participation and long horizons promoted cooperative institutions with just the minimum necessary external intervention. One can interpret this as a call for a minimum government, but I prefer to interpret it as a vote in favour of a better democracy as opposed to technocracy.

Thursday, October 17, 2013

The
supporters of the secession drive in Catalonia spend enormous efforts and
resources in trying to gather international support for their cause. There are
at least two books in English in the bookstores explaining the arguments in
favor of independence, written by local supporters (apparently they failed to
find foreign prestigious experts, which would have increased the credibility of
the endevour). The Catalan autonomous government is itself spending public
resources in this international campaign, for example by deploying an
organization of international supporters (of Catalan origin) called “Diplocat”.
Letters to President Obama have been sent (and received a cold shoulder).

The results
of all these efforts have been very meager. Basically, there is no relevant foreign
support for Catalan independence. European Union officials have repeatedly
stated that an independent Catalonia would start its life out of the EU, and
prestigious news organizations such as The Economist or the Financial Times
have expressed their support for a better, federal integration of Catalonia in
Spain in a united Europe. The promoters of independence should reflect about
the reasons of their failure. Perhaps the distributive implications of the drive
and of the actual independence (if it ever happens) of a relatively rich region
where human and identity rights are fully respected, are not the ones that
usually ignite international solidarity campaigns. We are talking about XXI
Century Catalonia, not India, South Africa or Tibet in the XXth Century. No
peace minded international activist would desire instability in Europe, especially
southern Europe and the Mediterranean. Federalism is as a more ambitious and at
the same time realistic alternative. Secessionists often argue that federalists
do not have supporters outside Catalonia (disregarding the opinions of 40% of Spaniards
according to a recent survey and the above mentioned international supporters),
as if implying that external support is not needed for independence. But new
frontiers are an international issue. Climate change, financial instability, or
global poverty cannot be fixed from any of the current national states in
Europe (as Daniel Cohn-Bendit often says), much less from a new, small
nation-state (especially if it is not accepted as a member of the European
Union).

In a very
revealing piece today in the New York Times (NYT), several Catalan business executives
express their discrepancy with the secessionist drive. The reporter only
collects the opinion of one executive in favor of independence. This is Jordi
Bagó i Mons, chief executive of Serhs, a provider of hotel catering and other
tourism services, who is a member of a business association that supports
secession. Mr. Bagó argues that with independence “we can construct a much
better economic model for Catalonia”. One wonders whether Serhs itself should
be an inspiration for this model, since the President of the company and former
politician, Mr Ramon Bagó i Agulló, has been investigated for fraud by the official
Catalan Anti-Fraud Office (see El Pais, January 29th, 2013). Very
appropriately, the NYT report explains how the Catalan government that promotes
the secessionist drive has itself been weakened by corruption scandals. It is
then not surprising that this movement fails to inspire foreign supporters, as
previous Catalan freedom fighters inspired the support of people like George
Orwell.

Tuesday, October 15, 2013

Today I attended the opening lecture of the Master in Economics and Business Administration at the Autonomous University of Barcelona, my university. It was given by Vicente Salas, a professor now at University of Zaragoza and in the past in our University that I admire, that was the chairman of my thesis committee in Florence back in December 2000. The topic of his presentation was Entrepreneurship and Development, where he presented a summary of the literature and a summary of his research on the topic. He left the most inspiring part for the end of his lecture, where he presented his thoughts on the relationship between economics and business, a topic to which he has devoted his academic career. He said that there were three ways to approach this relationship:
1) Economics AND Business. This is providing business people with a basic knowledge of economics, so that they can have a vocabulary and some basic ideas about the economic context, in a similar way as they should know something about sociology.
2) Economics FOR Business. This is about managerial economics, thus providing business people with some managerial tools inspired in economic rationality, such as incentive or game theory.
3) Economics OF Business. This should be about asking questions such as why firms and entrepreneurs exist. It should also be about the role of entrepreneurs as organizers and the economic role that organizations play in society and the input they contribute to productivity. It should be about continuing the agenda of Roland Coase, who recently passed away, and others who are concerned about some fundamental questions about how our society is organized.
Professor Salas argued that unfortunately most undergraduate teaching focuses on the first way of approaching the topic, perhaps a little bit on the second, but the third approach is almost absent and much more emphasis should be given to it.

Wednesday, October 9, 2013

Some economists tend to emphasize some market failures more than others, and despair at the failure of ordinary citizens to see the damage that their preferred market failure produces on the economy and society. A clear example is the emphasis on competition. I share a concern for competition: wherever possible and desirable, competition should be promoted. Competitive markets, under some conditions, are conducive to efficiency. However, these economists should not forget:
-The theory of the second best: when there is more than one market failure, addressing only one of them does not guarantee efficiency. For example, if there is a negative externality and market power, addressing only market power may make the externality problem worse by increasing output.
-The presence of a competitive market by itself does not do anything by itself in terms of equity, although competition may promote a more meritocratic society, which may be good if there is equality in the initial conditions.
-More competitive markets create losers. Potential losers will not accept more competitive markets unless there are mechanisms to compensate for the losses. Even if these mechanisms were present, potential losers may find that promises to compensate them are not credible, unless the adequate institutions are in place. Sustainable competitive markets require sustainable welfare states.
-Some competition takes place in markets where there are positional externalities, that is, consumers compete with others for status, as described by Robert Franks in "The Darwin Economy". This sort of competition is wasteful and has large welfare costs.
I agree that competition and competition policies are important ingredients of a modern economy, but competition should not be seen in isolation from the overall economy. Ordinary citizens are perhaps not that ignorant of the overall impact of competition.

Monday, October 7, 2013

In "The Globalization Paradox" Dani Rodrik establishes the trilemma between an internationally integrated economy, political democracy and the nation state. The three things together are not possible, and societies must choose at most two of them. In the 1920s most developed nations chose to exclude de facto political democracy by sticking to the gold standard, keeping the formalities of the nation state but making it impossible for majorities to impose their will. After the second world war, nation states limited international economic integration and preserved the possibility of majorities imposing their will for example through an expanded welfare state where democracies had this preference. Another possibility if to make progress toward a global federalism, making compatible democracy in a new global governance and global economic integration, but by leaving behind the nation state as we know it. Many may think that this is impossible, and certainly Dani Rodrik thinks that it is not even desirable, because nation states allow for diversity and experimentation. However, making progress towards federalism is possible at the European level, and we have certainly already seen much progress in this direction, for example in the Schengen agreement that establishes common border controls, or in the common monetary policy. The problem is that these arrangements are imperfect (as seen in the euro crisis or in the tragedy of immigrants in Lampedusa). The solution of the euro crisis and the Lampedusa tragedy is the same: we cannot stay in the middle. Either we make progress towards a more integrated, fully democratic and federal Europe, or we restore national border controls and national currencies. I believe it is much better to go forward, because there are many ghosts hidden in the European geography, and more Europe is needed as a collective good to keep peace and stability. In Europe, my preference for the two feasible sides of the Rodrik trilemma is clear: leave the nation states behind. The problem, and the deeper paradox, is that the decision has to be made by the nation-states themselves, because the European Union is a union of nation-states. They have voluntarily surrendered already much sovereignty, and they should surrender much more.

Thursday, October 3, 2013

Paul Krugman and Lydia DePillis explain that apparently well intentioned "big business" interests fail on many occasions to stop policy outcomes that are really bad for themselves. As an example, they mention the government shutdown in the US, which clearly goes against business interests. While conventional wisdom assumes that big business have a lot of power in politics, the fact is that, although they do try to have a lot of power, the degree to which they are successful depends on the strategies they follow, the strength of democratic institutions and other determinants. One of the reasons they fail to stop really disastrous outcomes is that, when they are transparent, they typically surround their pleas by an aura of political neutrality. When one of the political sides is much more biased towards irrationality, neutrality's only effect is to give an advantage to the crazy side. Something similar happens not only in the USA with big business, but also in other countries with all kind of people with professional or other reputations to maintain. For example, in Italy it is obvious that disaster for the country as a whole and for normal businesses in particular has a name: Silvio Berlusconi. And it is obvious to any external observer that the only serious organized alternative to Berlusconi is the center left. Why then many apparently reasonable economists, business people, professionals, artists, etc., fail to express their explicit support for the reasonable side is a mistery to me. In Spain, we are in the midst of an enormous economic and institutional crisis, with right wing parties in Spain's and Catalonia's governments not being even able to have structured negotiations that facilitate a formula that makes it possible for Catalonia to have a better status in Spain, mirroring the logic of federal multi-national states. Center left and left parties and organizations are developing very reasonable ideas on how to improve upon the status quo. But if they do not receive the explicit and active support of people that in private acknowledge that we are headed for disaster (one that could threaten the stability of the euro zone and southern Europe), disaster will just happen.